Germany's hard line on the stimulus: Why Merkel says 'Nein'

German Chancellor Angela Merkel (r.) welcomed Russian President Dmitry Medvedev (l.) for talks with German business representatives in Berlin on Tuesday ahead of the G-20 summit.

Herbert Knosowski/AP

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Berlin — Angela Merkel, the leader of Europe's largest economy, says no to offering more fiscal stimulus for the ailing global economy.

Ahead of the London Group of 20 meeting, whether this is a bargaining position or a firm principle is unclear. But the German chancellor is the locus of the issue – especially after recent comments that reveal an even tougher stance against further debt and spending.

The G-20, billed as of great historic and practical importance for moving the world economy forward, has steadily inched backwards from the expansive global "New Deal" envisioned by host British Prime Minister Gordon Brown last fall. President Barack Obama is stressing "unity" among the 20 nations that make up 85 percent of the globe's economic output. But the "significant stimulus" called for again this week by the White House has been met in Berlin without joy.

The most significant player now may be Chancellor Merkel, who has become something of a spokeswoman for Europe's view of the crisis, which calls for foregoing more stimulus – though adding cash for IMF protection of East and Central Europe – and stiffer regulation. In recent days, she's applauded Mr. Obama for backing Europe on regulation to stop toxic assets and tax havens, but she continues to say stimulus will not lead to "sustainable growth."

But Merkel, diplomats say, has combined a profound German instinct against debt – and its accompanying inflation – with a widely held sentiment here that the US and Wall Street are to blame for creating the global crisis. Ahead of German elections in September, the chancellor is also arguing that Europe's social safety net already constitutes enough of a stimulus and a higher percentage of debt than what's been offered by the US and Britain.

"We were living beyond our means," Ms. Merkel said at a meeting March 28. "After the Asian crisis and after 9/11, governments encouraged risk taking in order to boost growth. We cannot repeat this mistake."

Merkel told The New York Times this week that she had practical as well as philosophical reasons for her views. A "massive demographic change" in coming years will shrink Germany's population, she said.

Angling for a 'free' ride?

Diplomats, economists, and officials in Berlin, Paris, and Washington disagree on how Merkel's instinct for discipline, order, and accountability will play out in London. Some argue that Germany will be "more flexible" on stimulus, if the US fully digests the European view on regulation. Others feel her game plan is hardheaded "beggar thy neighbor" competition, relying on stimulus promised by others to boost a German economy now 40 percent based on exports. A global economic uptick by the end of summer would no doubt help Merkel in September's election.

"If we were in a cooperative game, everyone would offer stimulus," says Jean-Paul Pollin, a member of the French Circle of Economists. "But we are in a very non-cooperative game between the European leaders and the US. All Europeans are waiting for stimulus from outside.… Germany's best solution is to wait for the US, France, the UK, and others for a big stimulus that will help exports."

"Merkel says there will be a bounce in the summer, and that may be prudent," says Eloi Laurent of Sciences Po in Paris, who favors greater stimulus as a precursor to regulation. "But it is the language of someone holding elections in late summer. Economic strategy is being based on political strategy."

Germany has not so far experienced the raw end of the crisis; Merkel hopes it stays that way. Germany has a slight recession, no real estate bubble, and fewer losses on the stock market. Unemployment is not alarming. Some officials brightly predict a 3 to 4 percent growth rate by July.

In the recent years of heady global consumption, a sizeable part of the world's economic power grid started with high-end German machine tools purchased by the Chinese and used by cheap labor in Chinese factories to make toasters sold in the US for less than they are made in America.

The economic crisis has interrupted this wealthy trade stream to China. Berlin hopes it will restart as the global stimulus kicks in. But so far, orders are down. Shipping ports in Guangdong, China, are larded with empty containers.

German banking houses like Commerzbank now predict a 6 to 7 percent growth shrinkage, the worst in postwar Germany; last week the bank's chief economist said, "this has pulled the rug out from under our previous forecast."

Top German steelmaker, ThyssenKrupp, last week said it would cut 3,000 jobs. Also last week, the head of BGA, a German manufacturing association, said "the global economic and confidence crisis has now hit Germany's foreign trade." Industrial orders have shrunk by 8 percent.

Is social safety net strong enough?

Unemployment is nearly as great a bugaboo here as inflation. The ThyssenKrupp layoffs are symbolic, putting the German system of Kurzarbeit, or partial employment, into question. Currently, as many as 600,000 Germans work short hours at their jobs, with the state paying up to half the cost. The tacit deal is that corporations keep workers if they can see the economy and their position improving. Layoffs at premier industries could have a cascade effect. Mr. Laurent, at Sciences Po in Paris, worries that the social safety net isn't designed for large numbers of unemployed.

Officials at Merkel's Christian Democrat party say matters will clarify in coming months. "The crucial moment is this summer," says Heinrich Kreft, a senior party official. "Companies will keep workers on payroll if there are signs of improvement. If there is no light in the six to eight [weeks] before the election, the government might do more on stimulus."